Succession planning in construction: Money & time drive your exit strategy
In a perfect world, succession planning begins the day you become an owner, and it centers on a single question: How will you exit the business financially whole and relatively risk-free while knowing the company will continue on? Answering that question requires upfront soul-searching with respect to five main considerations: Money, time, legacy, family, and employees. We’ll focus on time and money here since these dictate the pace of your exit strategy and drive decision-making — especially if you don’t have enough of either.
Succession planning, exit timing, and funding your exit strategy
When would you like to exit the business? If you’re five to 10 years out, you have many options on the table, from selling to a third party or private equity group, or transferring to family or employees through an employee stock ownership plan (ESOP). If you’re two or fewer years out, the options shrink and trade-offs escalate.
Need to exit quickly and with a lot of cash? You’ll likely need to sell the business, without much say about the new ownership, who will hold leadership roles, or the company’s future name. But if you’re flexible on timing and how much cash you need, choices open up — sell to employees through an ESOP or transfer the business to family and get your liquidity out over the next five to 10 years. These are just two examples; an exit plan can be as unique as the business owner. That said, the goal of succession planning is to build a better company without you being critical to its operations, and a few basic elements can unlock more options:
1. Attract, develop, and retain great talent
Already have great talent? Wonderful. Your people are an invaluable asset. Have you addressed the last mile of skill development to ensure they’re ready to take ownership of client relationships and the business’s future strategy?
Are you paying that great talent competitively? Many owners offer a base salary plus annual bonus. This means you’re paying your people for short-term (one-year) performance. Owners considering their exit strategy need to retain the best talent — and secure their commitment for the future. Consider ways to tie bonuses to a longer-term vision, such as a five-year, cumulative bonus for staff who have invested in making the company more profitable and resilient.
Make it economically unappealing for good people to leave. This means both paying competitively and thinking longer-term about bonuses and other incentives. A strong, well-compensated, committed management team capable of taking on executive roles to lead the company forward is a critical piece of the succession planning puzzle.
2. Strengthen the balance sheet
A strong balance sheet is another critical asset for succession planning and your exit strategy. Lofty succession goals built on a subpar balance sheet won’t work. Be sure to build in room for error and the unexpected rough patch so your cash position, working capital, and equity can advance your retirement and exit planning goals.
While strengthening the company balance sheet, you also need to build wealth outside the business. you’ll have more succession options if you can be flexible with the sale price. For instance, it means a lot to some owners to be able to give a family member “a deal like I got” when they went into the business. Owners should also aim to reduce risk. Whether you sell or transfer the company, it must be viable and able to support future growth without you taking on new debt or other corporate risk.
3. Set realistic expectations
There are a lot of specialists who will gladly help you create an exit strategy, and you have to be careful whose advice you seek — some professionals only set up ESOPs while investment bankers will bring a different perspective on succession.
First and foremost, seek an objective evaluation of what the business is worth and a good understanding of the transactions common in your niche. Some areas of construction such as general contracting don’t see many third-party sales; they’re more likely to sell for book value or through an ESOP. Others working in specialty trades, infrastructure, or asphalt may very well sell in a multi-EBITDA scenario. Understanding when an ESOP works and when it doesn’t and what transactions look like for similar companies in your space — and what drives values up — are key to realistic expectations.
4. Customize your succession plan
A succession plan and exit strategy can be as distinct as the construction business and its owner — as long as they’re grounded in reality. Don’t assume your company is worth the same as your colleague’s, or that your exit strategy will be similar. Know someone who had a strong, multi-EBITDA exit? What elements might you need to integrate into your business to make it similarly attractive to private equity?
Which brings us back to timing. The longer your window, the more opportunities you have to define priorities, strengthen the business, grow your wealth, and shape your exit strategy to fit your goals.